When Your HOA Is Sued

Property Owner: “I just received a letter informing me of a lawsuit against our HOA. Should I be concerned? How might that affect me since it isn’t against me?”
Sometimes an HOA must bring a lawsuit against a property owner. At other times a property owner might bring a lawsuit against the HOA. When that happens there are a few things to keep in mind.

Careful First Steps

Property Owners - remember, you ‘are’ the HOA. A lawsuit against the HOA involves you. If the HOA loses in court, all the property owners in that HOA will be held responsible for meeting the expenses incurred as a result. Moreover, while a lawsuit is pending, real estate transactions within the HOA may be negatively influenced. In other words, take it seriously, but don’t make things worse by over-reacting.

HOA Board - When notice of a lawsuit has been received, the HOA board will meet with their Property Management Company in order to discuss the appropriate legal next steps.

Property Management Company - a competent, experienced property management company will know exactly what steps need to be taken and will guide the HOA board through the process. This will protect the board from making mistakes that could influence the outcome of the lawsuit.

Legal Counsel - the Property Management Company will make contact with the HOA’s own attorney in order to obtain counsel.

Insurance Company - the Property Management Company will also immediately inform the HOA’s Insurance Company of the lawsuit. The insurance carrier will involve their own attorney.

Resolution - each of the above entities will work together to expedite a resolution.

Information - it is essential that the HOA board members and the Property Management Company ‘not’ divulge details about the lawsuit that could be used against the HOA. Legal counsel will most likely advise that the HOA board member ‘not’ discuss any aspect of the case with anyone, particularly the party that has brought the lawsuit against the HOA.

Where Does This Leave Property Owners?

Communication - once all the above parties have been informed and begin working on a resolution, the HOA board will direct the Property Management Company to send out a letter to all HOA property owners informing them that there is a lawsuit pending resolution against the community. It may briefly state the nature of the lawsuit, but will probably not disclose the name of the party that initiated litigation nor the specifics. There will, of course, be another letter informing them when there has been a final resolution.

Disclosure - this initial letter to owners is important because the Property Management Company will be contacted by lending institutions working with the sale of any property within the HOA. The Property Management Company must disclose if there is any litigation against the HOA. Without discussing the details of the lawsuit, the Property Manager should be willing to address any questions about the effect of a lawsuit against the HOA and/or the provisions of governing documents (Bylaws and CCR).

Lenders -A lender may be reluctant to process any loan requests as long as a lawsuit is pending. This may cause some financial difficulties to owners who want/need to sell and for prospective buyers desiring property within the community. Each lender will have to determine, on a case by case basis, if the lawsuit has any real merits that might impose a large special assessment upon a new owner.

Public Access - since neither the Property Management Company nor the HOA board members will be permitted to provide any specific information/documents regarding the litigation - other than the basics which are stated in the letter to home owners - the only available source for more specific details about the case may be found in your county's public records. In other words, while it is not wise for the HOA board members nor the Property Management Company to discuss specifics of the case - since they are the ones being sued - if more detailed information is wanted by property owners, it may be obtained in public access documents.

Concerns - most often, the one bringing the lawsuit against the HOA is an owner within that HOA, and may well be a resident owner. Though many other owners might agree with the basis for the lawsuit, the fact that pending litigation hurts all owners can cause ill feelings toward the one bringing the lawsuit. These negative feelings may be exacerbated if other owners come to believe that the lawsuit is frivolous and thus unnecessarily causes delays in the sale of their property or causes lenders to refuse to process loans.

One More Note

If you are an HOA board member, HOA property owner, or property manager, be sure to get legal counsel that is appropriate to your locality. Each state and county may have different laws that speak to this issue. The Bylaws and CCR’s also differ from HOA to HOA. In other words, though a lawsuit against one HOA may be successful, the identically worded lawsuit may not succeed against another HOA, simply because the provisions of their Bylaws and CCR’s were not the same.